Shadow Economy and Production Factors: Results from an Empirical Analysis with a Panel Data Set
Shadow Economy and Production Factors: Results from an Empirical Analysis with a Panel Data Set

Summary/Abstract: The main objective of this article is to examine the existence of a relationship between the shadow economy and macroeconomic factors of production. Based on a dataset of 50 countries over the period from 1991 to 2015, we find that the size of the shadow economy is inversely related to all three macroeconomic production factors – labour, capital stock and total factor productivity. This result provides an explanation for the fact that, in many cases, the shadow economy has a negative impact on economic development. We also find that the strength of the relationship is not the same for all factors of production. While for capital and for total factor productivity, the inverse relationship with the size of the shadow economy is strong, in the case of labour, this relationship exists, but it is weaker. The reason for this is the specific nature of many of the shadow practices, related to undeclared work, which allow such an effect.The results of the present study could provide arguments for the formation of effective economic policy measures to limit the negative effects of the shadow economy.

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